Archives for January 2015

MarketWatch Infomercial: Can Millennials Finally Afford a Home?

Courtesy of Mish.

The Outside the Box MarketWatch Opinion of Damian Maldonado is Millennials Can Finally Afford Homes with New Mortgage Rules.

Let’s start with a look the new rules.

New Rules

  1. The administration earlier this month cut the premium that borrowers with a Federal Housing Administration loan must pay for mortgage insurance to 0.85% from 1.35%. The half a percentage point reduction will reduce the cost of the average FHA loan by about $1,000 per year.
  2. Fannie Mae and Freddie Mac last month dropped the minimum down payment to 3% from 5% on some of its mortgages. FHA requires a 3.5% down payment.
  3. Grant programs, such as CHFA in Colorado, allow home buyers to purchase a home with as low as a $1,000 down payment.

Hoop Jumping

Maldonado jumps through all sorts of hoops to justify the new rules, pretending that “new regulations, should stop the problems that led to the subprime mortgage crisis“.

He concludes “Perhaps this will be the year this generation will leave their expensive rentals, or their parents’ basements, and move into their own homes and live the American Dream.

I propose that after this relentless rally in home prices, the above “new rules” are too risky. Low down payments would have made more sense actually at the bottom of the market, when standards tightened.

This is typical regulatory BS, lowering lending standards when they should be tightened, and tightening them when arguably they could be lowered.

The cure in this case is to get rid of Fannnie Mae, Freddie Mac, and the FHA, all useless organizations that have done nothing but raise the cost of housing by promoting houses as the “American Dream”.

Nonetheless, I offer this musical tribute.

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The Age of Intervention Continues

The Age of Intervention Continues

By Dennis Miller

One key perk to working alongside investing seers is the opportunity to ask them the big questions. Wondering what lies ahead, I asked Casey Research Chief Economist Bud Conrad and technical analyst Dominick Graziano to share their views on what investors should expect in 2015.

These two gentlemen blow me away. Bud can make big-picture forecasts with uncanny accuracy. Dominick is a pure trader, relying on historical charts and graphs and seeing relationships I had missed. He is totally unemotional in his approach and makes decisions based on what the charts tell him. Like Bud, Dominick has made many calls far ahead of time.

Here’s what Bud and Dominick had to say.

Dennis Miller: Bud, I’ll start with you. We’ve experienced a lot of changes in the last few months. A new Congress is being sworn in, the Federal Reserve has stopped Quantitative Easing, and the energy industry is now quite volatile. What do you see as you look into 2015?

Bud Conrad: To get the discussion positioned, I’ll make some summary evaluations: the US and China are doing comparatively well. I gave a keynote speech in China to a huge mining conference where everything is booming, including the pollution. The US is benefiting from the reflation of our monetary bubble and hasn’t gotten to the end of this round yet.

Europe is declining from sanctions, burdensome bureaucracy, and weaker peripheral nations of Portugal, Ireland, Italy, Greece and, Spain (PIIGS). Japan has returned to slow growth despite money printing and should be a warning to the rest of us that money printing has its limitations.

Today governments and central banks can drive the markets even more than traditional measures like profits or rational supply and demand. So to predict markets, we need to predict the actions of the big players: central banks, government regulations, sanctions, political alliances, and wars.

The expansion of government debt is at record highs for many countries. We will see further money creation by most of the world central banks to manage the government deficits and big private debt by keeping rates contained. That means that the Fed will be back with some form of money creation, probably in 2015.

Today the central banks have distorted the markets so much with their zero-interest-rate policy that they cannot return to normal minor market interventions.

The base US economy is not doing as well as aggregate statistics tell, because the rich are doing especially well, while the middle class is hollowed out with manufacturing moving abroad. The stock market is doing well because there is no better game in town. Lower oil prices leave more money for the consumer to spend, and thus for companies to profit, so it is supportive for stocks.

For the first half of 2015, I see stocks doing well, although there are many problems like new wars or the rise in the dollar that could change the situation, so caution is warranted for the second half of the year.

In discussing the power of big institutions to affect markets, we should realize that interest rates are manipulated by the central banks that intervene directly to buy up government and private debt. Today’s rates are not market set. This manipulation is not concealed. The trading is huge, with $450 trillion of interest rate swaps notional value out there. The London Interbank Offered Rate (LIBOR) was rigged and billions of fines paid.

The central banks under fiat currency rules can support this for only a few years. In the longer term—probably beyond 2015—this will not work as new Fed programs will cause inflation fears. Instead of interest rates falling, they may rise from a new Fed stimulus program as [if] people lose confidence in the dollar itself.

We have recently seen the prosecution of big banks for manipulations of foreign exchange, and now the London gold market fix. This leads me to say “There are no markets, only interventions.”

Dennis: Dominick, I know you approach things differently when you look at the investing world. What is your analysis telling you about 2015?

Dominick: Dennis, as you know I take an intermarket approach to analyzing global markets. Global markets are like a machine, albeit a clunky one. I look across all asset classes, currencies, commodities, stocks, and bonds to see where money is flowing. To be a successful investor or trader requires following the money.

There were several developments in the second half of 2014 that will be the driving forces for this coming year. First and foremost, the US dollar broke out of a multiyear consolidation pattern. Dollar strength will likely continue into 2015. That dollar strength has translated into commodities being under pricing pressures. This will also continue into 2015. I expect oil, copper, and industrial metals to continue to show relative weakness this coming year, in general. As always, we should expect countertrend rallies, but these should be viewed as selling opportunities.

Most immediately, I think we could see a sharp rebound in energy stocks at the beginning of the year, but this rally will likely fail.

Long-dated US Treasuries will continue to be a beneficiary of the strong US dollar. They are currently overbought, but the trend in bonds is higher and yields lower.

The strength of the US dollar will start impacting earnings of large-cap US equities in 2015. The majority of large-cap US companies obtain a fair portion of their earnings from overseas. While US major equity market indices are near all-time highs, I think we are in the process of building an intermediate to longer-term top.

The plunge we saw in October was a warning sign. We will see the emergence of a major bear market as 2015 progresses. Bear markets rarely leave any sector unscathed, but utilities, health care, and consumer staples will likely show relative strength. Continued low interest rates could also benefit REITs. In contrast, growth stocks should be avoided. I think equities should generally be underweighted and cash overweighted in 2015.

Dennis: Bud, Dominick, thank you. This was exact the long-range discussion I was hoping to have.

To receive more unique economic insight and up-to-date investing news each and every Thursday, sign up for our free, retirement-focused e-letter, Miller’s Money Weekly here.

The article The Age of Intervention Continues was originally published at
Picture via Pixabay. 

Here Are The 13 Banks That Rule The World

Courtesy of Lee Adler of the Wall Street Examiner

A central tenet of my view of the markets is that there’s just one worldwide pool of liquidity, and it is ruled by the same Killer Whales operating out of a few world financial capitals. We call those whales (or sharks if you prefer) Primary Dealers. They feed in the ocean of cash pumped in by the world’s major central banks, essentially the Fed, the ECB (Europe), and the BoJ (Japan). The PBoC (China)  is also playing a growing role as it integrates its financial markets with the rest of the world’s, but its system does not use Primary Dealers, per se, and its linkages to the rest of the world are more obscure. The BoE (UK) is a minnow in the sea of big fish. It swims along with them.The same banks feed at the BoE trough.

Here are the Big 3’s Big Fish. 13 big banks are the kings of the financial world. 28 others are also players who drink from one or two central bank fountains and play in the worldwide sea of liquidity.

The Big Fish- Click to enlarge

The Big Fish (Download PDF)

Central banks only pretend to make policy. Once they print the money and purchase securities from the Primary Dealers (or lend the cash to them), the dealers decide what to do with it. The dealers are the real policy makers. The central banks have no control over where the cash goes once they intone “Abracadabra” (Aramaic for “I will create as has been spoken”) and magic wand wave the cash into existence.

With Quantitative Easing, the central banks bring the money into existence by making deposits in the Primary Dealers’ accounts at the central banks in payment for the securities the central banks purchase from the Primary Dealers, or by making loans to them. What the dealers do with the money from there is up to them, although they are loosely required to purchase government securities when the central government auctions them. Since there are always plenty of other bidders for the government paper, the Primary Dealers end up with billions in excess cash.

That is why this happens.

Major Central Bank Balance Sheets and US Stocks- Click to enlarge

Major Central Bank Balance Sheets and US Stocks

In 2001 the IMF surveyed 39 of the world’s national governments to get an idea of whether Primary Dealer systems were positive factors for financial system development. Not surprisingly, there was broad agreement that Primary Dealer systems were “to be highly recommended.”

The IMF study asked the nations about the advantages and disadvantages of Primary Dealer systems.  On the disadvantages question, 11 of the 20 developed nations in the survey either had no comment or said there were no disadvantages. 7 of the nations beat around the bush with niggling issues. Two, the UK and Canada cited the need to supervise and regulate. The UK cited “cartels” as an issue. Singapore cited an “unlevel playing field.”

Only one, Belgium, the headquarters of the ECB, nailed it. Belgium said:

A concentration of PDs is developing in the banking community over the world, with the same PDs evident globally. The result is a certain degree of oligopoly power.

There you have it, right from the horse’s mouth. This fact has been the basis for my research in tracking the actions of the major central banks every week for the past dozen years.

I talked about this in the summer of 2013 in a documentary about the Fed by CNBC Africa’s Lindsay Williams. Here are the excerpts from that documentary where I discuss these facts.

Get regular updates on the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!
[Originally posted under the headline The Central Fact – The Same Whales Rule In The Worldwide Liquidity Pool]

Here’s a Picture of The Single Family Housing Recovery- Holy Cow!

Courtesy of Lee Adler of the Wall Street Examiner

Here’s a brief comment from leading analyst on the new home sales news:


[But look at the chart.]

Single Family Housing Recovery- Click to enlarge

Single Family Housing Recovery

In case you’re wondering, the seasonally adjusted (SA) headline, larger than expected gain, was due to calendar factors and the bogus drill of annualizing monthly SA data, which merely magnifies the monthly error times 12. But hey, who thinks about that! Certainly not mainstream financial news repeaters.

Builders typically don’t book sales on weekends, even though contracts are often signed on weekends. The worker bees who review the contracts and enter the data, work regular business hours Monday to Friday. Sales from November 29 and 30 were booked on December 1. That’s why the headline number “beat” Wall Street conomist consensus expectations. Likewise, the November number “missed” by a significant margin because those end of month sales in November weren’t booked in November, but in December.

To get around that problem I looked at the two months combined. This year, November-December actual monthly sales were down an average of 4,000 units from October. In 2013 they were down an average of 5,000. In 2012 they were down 1,000. So there’s just no news here. A drop of an average of 4,000 unit sales per month in November and December is par for the course for this time of year. At an average of 32,000 unit sales for November-December, total sales stink on a historical basis. There’s no sign in the current data that they will stop stinking any time soon.

When you take the time to look at the actual unadjusted data, you see these things. If you’re the mainstream media, you just ignore the facts and parrot everybody else–crowd behavior at its worst. So if you feel compelled to read and believe the headlines, you’ll be misled time and again. At least look at a chart of the actual data over time, see the trend for yourself, and ask yourself the question, “Has anything changed here.” Amidst all the media histrionics, either jumping up and down and cheering, or hand wringing and gnashing of teeth, most of the time the answer will be, “No, nothing has changed.” And that’s the answer here.

Get regular updates on the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE's Professional Edition risk free for 30 days!

Lies And Deception In Ukraine’s Energy Sector

Lies And Deception In Ukraine's Energy Sector 

Courtesy of Robert Bensh for 

The Ukrainian government has repeatedly claimed it is doing its best to improve the oil and gas investment climate, but official statements are the opposite of the reality, as Prime Minister Arseniy Yatsenyuk is leading the great deception. 

According to Prime Minister Yatseniuk, Ukraine has taken a number of important steps to reform the energy sector, and has even achieved success in the formidable fight against rampant corruption, as well as signed open and transparent contracts for purchase of the natural gas from EU member states. Now he claims Ukraine is looking forward to Western companies' investment in Ukraine's gas transportation system. 

"I would like to point out where we have succeeded: we have succeeded in overcoming corruption in the energy sector. Billions of dollars, which previously used to flow into the pockets of Ukrainian oligarchs, are now being brought out of the shadows. At present, Ukraine purchases gas under transparent and open contracts with European companies," Yatseniuk recently told a joint press conference with German Chancellor Angela Merkel in Berlin. 

Even the President has made misguided and naïve statements this past week in Davos, declaring that “…Ukraine will build new ways for receiving Norwegian gas and gas from Europe, and Ukraine will also produce shale gas." 

The stark reality is that these official statements are in no way reflected by government action, and the gas market players in Ukraine recognize the deception as does the energy industry as a whole. 

The real story is that while gas has been received from Norway in reverse flows, Ukraine's current energy strategy, taxation and fiscal regime has forced Ukraine's current producers of oil and gas to stop drilling new wells and curtail production. 

The development of Ukraine's potential shale gas is even further afield with Chevron announcing its departure from Ukraine and only Cub Energy remaining in the country as an operator with both technical and local expertise in developing the shale. Even if shale can be developed in Ukraine it will be extremely challenging given the highly service-oriented logistical train, which does not presently exist in Ukraine. 

In the course of the last year the Ukraine's private gas producers were doing their best to overcome, if not merely survive, the consequences of the government's move to significantly increase fiscal and administrative pressure on the industry without any consultations with the latter. The government failed to deliver on its promises, and the only thing it managed to achieve was an undermining of any trust the industry may have had in it. 

Ukraine's current regulatory and fiscal systems governing the energy sector are overly complicated and non-transparent, even without the major political and military conflict with Russia and annexation of the Crimea. The implications have been significant. Since last year, all major oil and gas projects in Ukraine have significantly slowed down at best, and been suspended entirely at worst. 

Issue by issue, the lies continue to mount. 

Rising Taxation 

The government recently raised the tax burden on private natural gas producers twofold (55% of the sales price – for the natural gas extracted from deposits up to 5km, and 20% – for the natural gas extracted from deposits deeper than 5km), instead of implementing long-awaited market reforms. Notwithstanding its own promises for this to be a temporary measure by 1 January 2015, at the initiative of the Ministry of Finance, just a few days before the New Year, Parliament rendered the tax increase permanent–in violation of the Parliament majority's Coalition Agreement. 

It is interesting to note that the practicability of these high rates was based on the calculations and official data of the Ministry of Finance for the old huge fields that had been explored and developed in Soviet times by state-owned oil and gas companies, while the gas producers were deprived of the opportunity to present their own figures and assessments for the new wells drilled on their smaller fields. The government simply brushed the matter aside, stating that the costs and expenses claimed by the investors were inflated. 

Most poignantly here, the figures suggested by the Ministry are so wildly out of line with the facts that even state-owned oil and gas companies refuse to acknowledge them. Recently state-owned Naftogaz calculated the economical production cost of natural gas extracted by its subsidiary, Urgazvydobuvannya, up to UAH 5,430 [USD 344] for 1,000 cubic meters (excluding VAT), which is much higher that the data submitted by the Ministry of Finance (according to which the gas production expenses do not exceed UAH 230-240 [USD 14.6-15.2] per 1,000 cubic meters). 

Investors Are Ready for Cooperation, Not the Government 

Private gas producers have been open about their costs and expenses. Some of them are actually publicly traded companies (JKX Oil & Gas, Serinus Energy, Regal Petroleum and Cub Energy), and their financial data is open, transparent and publicly available. Over and over again investors sent letters to the Ministry of Finance, with a call for cooperation and open dialogue, demonstrating the relevant figures and presenting underlying documents and statistics. For some reasons the Ministry chose to ignore their efforts and declined any suggestions to establish a joint working group on this matter. 

Instead of working closely with the industry the Government has already pushed independent businesses out of the gas market by introducing Naftogaz's monopoly on gas supplies to large industrial consumers. This is because the government has been trying desperately to ensure financial support for the eternally cash-starved Naftogaz. Forcefully redirecting the financial flows from gas consumers in favor of Naftogaz was a small-minded, short-sighted remedy. Such administrative measures shocked the Energy Community, which demanded explanations from Ukrainian officials as such measures completely contradict European 3rd Energy package. 

Corruption in the Energy Sector 

No need to say that such a state of affairs only encourages corruption in the country. In spite of the Prime Minister's promises and assurances to the contrary, the energy sector is still the biggest source of corruption in the Ukrainian economy. 

Repeated reports by the IMF, the World Bank, and the International Energy Agency (IEA) bring up the issue of corruption in the energy sector. They strongly recommend abolishing price subsidies and cross-subsidization, as well as raising gas prices to a level that will at least cover the production costs of the state producers. Ukraine's system of gas subsidies for households has long been abused by the gas distribution companies that are able to buy gas intended for households at subsidized prices and sell it to businesses at much higher market prices, with a 200-400% margin. The estimated budget losses exceed hundreds of millions of dollars per year. No need to say that the existing system only further destabilizes Ukraine's economy and puts enormous pressure on Naftogaz and its subsidiaries, at whose cost these subsidies are cross-directed by the Government. 

No Reforms, No Success 

It is obvious that the measures and steps taken by the Ukrainian Government have nothing in common with successes and reforms claimed by Arseniy Yatseniuk, as neither doubling tax rates and serving the oligarchs' interests nor corruption and monopolization of the gas market correspond to the recommendations given by the Energy Community and IMF to Ukraine. Despite repeated announcements, implementation of the reform has been held back by fear of losing the electorate's support and approval of the oligarchs' groups. Under the mask of nominal fight with the oligarchs the Government takes populist decisions and the Parliament adopts killing laws. One must admit that the Government seems to be unwilling to undo the money-making mechanisms in the energy sector. 

Given the desperate situation in which Ukraine finds itself today, it should have become extremely committed to the proper development of its domestic gas production, as that would introduce some extra volumes of the gas produced, in addition to 20 bcm domestically, into the local market to satisfy Ukraine's ever-hungry annual consumption of around 53 bcm. This would also allow Naftogaz to save some foreign currency reserves on buying imported gas in lesser volumes, including gas coming from Russia. As a result, financial pressure on the state budget and government (which attempts to plug Naftogaz' deficit by any means necessary – including loans from state-owned banks, international financial institutions and currency reserves of the National Bank of Ukraine) could have been significantly lowered. 

Instead, the government has directed its actions against independent gas producers and the continuing crackdown is severely affecting both the country's energy independence and its currency reserves. The massive fiscal and administrative burden and lack of investment in the national gas extraction industry will only result in further decline of gas production, worsening of economic conditions and a higher degree of Ukrainian dependence on Russia. Ukraine's short sighted policy moves ensure that investment in the sector will cease and attracting new capital will become nearly impossible as Ukraine will be viewed as hostile based on it's treatment of businesses currently operating in the country. 

The revenues that the government hoped to generate from taxation of the oil and gas companies with the concomitant politically popular taxation of the oligarchs is proving to be a failure, as its actions are not only killing the independent gas production industry in the country, but are in fact depriving Ukraine of the opportunity to become a strong, energy independent economy. Without implementation of the necessary reforms, the Ukrainian energy sector will continue to be the nursery of corruption and playground for blackmail, which Russia enjoys greatly. 

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Fed Statement Today: Between a Rock and a Hard Currency

Courtesy of Pam Martens.

Jeffrey Gundlach, DoubleLine CEO,  Tells CNBC's Bob Pisani What He Think the Fed's Really Up To With Its Interest Rate Talk

Jeffrey Gundlach, DoubleLine CEO, Tells CNBC’s Bob Pisani What He Thinks the Fed Is Really Up To With Its Interest Rate Talk

The Federal Open Market Committee (FOMC) of the Federal Reserve will release its monetary policy statement at 2 p.m. today against a backdrop of extraordinary global events since its last statement on December 17. Since that time, deflationary forces have picked up steam in the 19-member Eurozone forcing the European Central Bank to announce a large scale quantitative easing program to buy up government bonds in the hope that the added liquidity will spike spending and inflation.

A political earthquake has also been unleashed by the Coalition of the Radical Left, known colloquially as Syriza, seating their candidate, Alexis Tsipras, as Prime Minister in Greece. The win came on a platform to end austerity and renegotiate the terms of the Greek bailout. This is causing spasms in stock and bond markets in Europe over concerns it could lead to Greece’s exit from the Euro or cause other debt-laden Eurozone members to ask for similar concessions.

Here at home, tremors have been picking up pace since the December FOMC meeting. Large corporations have been announcing big job cuts: American Express, 4000; Coca Cola, 1600 to 1800; IBM, at least 2000 with rumors suggesting the number is far higher; Schlumberger, 9000; Baker Hughes 7000; U.S. Steel 750.

Part of the downsizing problem is the global economic slowdown but another serious headwind for U.S. based multinational corporations is the strong U.S. dollar which has gained about 20 percent against other major currencies over the past eight months. A strong dollar hurts U.S. based multinationals’ earnings and can erode market share by making their products and services less competitively priced for consumers in foreign countries who are making their purchases in weaker currencies. U.S. companies which have already blamed the strong dollar for crimping earnings include Procter & Gamble, Pfizer, DuPont and Goodyear.

U.S. multinationals know they have the Fed to thank for the dollar’s strength. The Fed’s persistent chatter that it plans to raise interest rates later this year on the premise of improved economic conditions here at home has put a prop under the dollar and led much of the world to believe that the U.S. is back to its goldilocks economy – not too hot and not too cold. Neither Wall Street On Parade nor DoubleLine CEO Jeffrey Gundlach is buying that spin.

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What Would You Do?

What Would You Do?

Courtesy of Paul Price

Suppose you had the technical ability and raw materials to print up counterfeit dollars, euros or yen that were identical to the real things. Assume you could spend them as fast as you could create them with no fear of any repercussions.

Would you prudently print up only as much fresh currency as you needed for your current lifestyle? Would you create just a bit more than that to help relatives or those in need?

It is most likely you’d have your printing press running 24 hours a day, seven days a week. Becoming the richest person in the world would confer great power upon you.

You could rationalize this action because you plan to use the money for good purposes. Imagine the warm feeling you’d get by giving every person in America one million dollars, no strings attached.

Then think about what would occur almost immediately afterwards.

The “easy come-easy go” principle would take effect. Car dealer inventories would be cleaned out instantly. Wal-Mart, Target, Kohl’s, Nordstrom, even high-end Saks Fifth Avenue and Neiman Marcus would have nothing left to sell.

SOLD OUT - image

Smart manufacturers and merchants would withhold inventory because they knew the abundance of money, with no new extra supply of goods, would drive prices through the roof.

The people controlling today’s currency issuance are well aware of this. That is why newly minted funds from QE (quantitative easing, A.K.A legalized counterfeiting) programs never reach the general population.

Immediate distribution of wads of money to everybody would quickly destroy the financial system.

Doing it gradually, under the average person’s radar while keeping the benefits contained to a small group (politicians and bankers) allows favored individuals to add great wealth without immediately noticeable damage.

Before 2008’s crisis Central Banks did not believe they could get away with simply conjuring money out of thin air. The ‘bond vigilantes’ would have demanded higher and higher interest rates on government debt, busting budgets around the world.

First America’s Zero Interest Rate Policy (ZIRP) and later Europe’s Negative Interest Rate Policy (NIRP) took care of that major hurdle. Those policies destroyed the rate setting ability of the debt auction markets by injecting shill buyers (the Central Banks) to bid up bond prices on an unlimited basis.

The Bank of Japan (BOJ) started slower but has now surpassed both the US and Europe in terms of fiat-based money creation versus the size of GDP.

Do counterfeiters keep hordes of phony $100 bills in their home safes? No. They want to spend that fake cash ASAP, turning it into real assets whose value cannot be diluted away as the supply of money expands dramatically.

That is why global real estate, stock prices, corporate bonds, fine art and antiques have exploded to the upside. Even gold has been showing signs of life recently.

Gold  60-days as of Jan. 26, 2015

When fiat currencies finally collapse these hard assets can be converted back into whatever is serving as ‘cash’ in the new environment.

The BOJ recently bought over $5.6 billion of foreign denominated stocks in just one week. Every yen devaluation makes those stocks more expensive when reconverted back into local currency.

Japanese Buying of Foreign Stocks for Guru Focus

The one asset class that central banks don’t want to touch is sovereign debt. Central banks know many of these foreign bonds will end up “toxic” — values slashed or in default. The central banks need to pawn off as much of the risk as possible to private entities and citizens rather than leaving themselves exposed when these bonds officially go bad. They will leave privately owned banks, insurance companies, individual investors, fixed income mutual funds and pension plans on the hook when the shit hits the fan, somewhere in the future.

Unlimited money printing by the world’s central banks will, by definition, devalue the currencies due to too much money chasing the same number of goods and services. Excessive money printing will ultimately make fiat-based currencies worth much less. This is already occurring right now in Venezuela and Argentina.

So stop worrying about whether stocks are going to crash. The real danger is holding major assets in ‘risk-free’ fiat-based money.

Clash Over Sanctions: Syriza Opposes Sanctions on Russia, Calls Them “Neocolonial Bulimia”; Negotiation Rules

Courtesy of Mish.

The Blowout Victory of Syriza has taken on some new meaning outside of Grexit possibilities.

Please consider Greeks Rebuff EU Call for More Russia Sanctions.

A spokesman for the ruling coalition of Alexis Tsipras, prime minister, said Greece had not approved a statement from EU heads of government that asked their foreign ministers to review further sanctions in response to the latest flare-up of violence in eastern Ukraine, blamed by the US and most European nations on Russian-backed separatists.

The Greek statement raised questions over whether the new government, led by the radical leftist Syriza party, would support a continuation of existing EU sanctions, including visa bans and asset freezes on Russian officials and Moscow-supported separatists, when they come up for renewal in March.

German chancellor Angela Merkel warned last month that Moscow was trying to make some Balkan states “politically and economically dependent”.

[Mish comment: But hey – political and economic dependence on Germany and the Troika is of course perfectly acceptable]

Nikolai Fyodorov, Russia’s agriculture minister, suggested on January 16 that, if Greece’s debt woes forced it to leave the EU, the Kremlin would help Athens by lifting a ban on Greek food exports that forms part of the measures adopted by Moscow in retaliation for western sanctions.

Syriza has already given a taste of its foreign policy outlook in the European Parliament, where, since last May’s elections, its MEPs have adopted a number of pro-Russian positions, including voting against a EU-Ukrainian association agreement.

Costas Isychos, a Syriza foreign affairs spokesman, last year derided western sanctions on Russia as “neocolonial bulimia” and praised the military efforts of the Kremlin-backed separatists in Donetsk and Lugansk in eastern Ukraine.

Syriza’s 2013 party manifesto demanded Greece’s exit from Nato and the closure of a US navy base on the island of Crete.

Though a Nato member, Greece in modern times has often enjoyed warm relations with Russia, and the Soviet Union before it, no matter what the political complexion of the government in Athens. The two countries are culturally close, with a shared Orthodox religion, and leftwing Greeks in the cold war used to have an anti-US, anti-imperialist outlook very close to the views of Moscow.

"Neocolonial Bulimia"

That's a good term. It applies to the Troika as well. The IMF is not out to save Greece, it's out to loot Greece for the benefit of external bondholders….

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Looks like we got ourselves a ballgame

Looks like we got ourselves a ballgame

Courtesy of 

On October 15th, I officially declared the Relentless Bid era over (see There She Goes, My Beautiful World).

It wasn’t a bold call, markets had been acting differently since at least last August. Selloffs were occurring with more frequency and less stocks were rising as we made subsequent new highs. The days of “just buy anything” in the stock market had come to a close, the return of winners and losers, volume and volatility, was nigh.

Fast forward a few months later and it looks like we got ourselves a ballgame once again. The no-vol, sleepy grind higher has been replaced with all sorts of drama. Confusing economic data points abound. Global macro bullshit is back. People are talking about Greece like it’s an actual economy and not just an abandoned museum with $350 billion in debt.

I don’t know the real reasons for why BTFD isn’t working so automatically, so effortlessly, anymore. Neil Irwin at the New York Times says it’s because of currency fluctuation wrecking the earnings reports of US multinationals and because the drop in crude has castrated capex budgets from coast to coast. That all sounds realistic, sure.

But the why isn’t terribly important to me. The what, however, is very interesting.

I submit to you that this new phase of deflation fear and headline-humping is actually a good thing for both the markets and for the professionals – like myself – who work here.

Financial advisors, traders, hedge fund managers and other asset assigners cannot distinguish themselves when the only thing that goes up is the S&P 500 and it goes up every day, every week, every month of the year. We mostly waste our efforts and our time in that atmosphere, which had been in force for approximately 24 months straight until this winter. When investment profits become automatic for anyone who simply shows up, and diversification looks increasingly asinine with every quarter, we become almost useless – vestigial. 

Here we are, discussing hedges and protection and non-correlated asset classes and Value at Risk calcs and risk-adjusted returns and it’s like a giant f***ing joke as the ice cream man remains parked right outside our window. Any discussion of the risk of US stocks had become almost a non sequitur by the end of last year. “What are you even talking to me about right now? What risk?”

Now of course, consequence-free environments don’t actually exist in markets or in life – at least not for long – but even still, it was beginning to get really sad around these parts.

But the profits for just showing up aren’t quite so automatic so far this year and the large-cap US stock rodeo seems to be coming unhinged. Today’s 300 point Dow decline on the type of luke-warm data mix that used to be good for a hundo to the upside is yet one more piece of evidence that attitudes have changed.

There isn’t a single major US stock market average that’s in the green for 2015 save for the SmallCap 600, which is ridiculous; it’s like watching the jockeys run down the field at Belmont without their horses underneath them.

In the meanwhile the dollar is racing higher and so is gold, in what’s become a bad Buddy Cop flick without a plot.

Screen Shot 2015-01-24 at 8.24.01 AM

And despite the knock-down, drag-out bonanza earnings report from Apple we got this evening, blow-ups like we’ve seen in Caterpillar are much more common (the trifecta: currency woes, oil woes, capex woes all in one).

But again, this is not a negative, it’s a positive. Pros have a reason to get out of bed again and do their jobs. Vanguard may go a month or two without shattering an AUM record. And a much-needed dose of reality is being injected into the psyche of a hundred million investors. It’s not all Viennese dessert carts being wheeled out day after day. There’s some pain in this thing.

The paradox of stock returns is that stocks are supposed to carry more risks than bonds – and yet they out-earn bonds over the long-term, which should make them appear less risky, not more risky. When the extra return of equities is not being earned with extra risk, the game becomes flawed and the players become reckless. I’d argue that this is a net negative for the investor class, because of the bubbles it eventually leads to.

And so as a professional, and as a person, I’m glad to see an environment that forces us to earn our upside once again.

Game on.


Greek Payback Math at 0% Interest

Courtesy of Mish.

Payback of Greek Debt

Greece has something like €315 billion of public debt.

Forget about that. Instead focus on liabilities as presented in Revised Greek Default Scenario: Liabilities Shifted to German and French Taxpayers; Bluff of the Day Revisited.

The above total is a “modest” €256 billion to be paid back over time.

  1. Assume 0% interest
  2. Assume a Current Account Surplus of 3% of GDP
  3. Assume Greek Debt-to-GDP is 176%
  4. Assume Greek Debt €312 billion
  5. Assume Greek GDP is €178 billion

Point 5 is derived from points 3 and 4. The numbers seem to vary a bit depending on the source, but they should be close enough for this exercise.

Payback Math at 0% Interest

Let’s assume that Greece can run a 3% current account surplus for as long as it takes to pay back €256 billion.

3% of €178 billion is €5.35 billion. To pay back €256 billion it would take about 48 years. That assumes 0% interest and a 3% current account surplus every year for 48 years!

Those calculations ignore rising GDP. But they also ignore a huge burden on Greek citizens for 48 years.

Let’s be honest: Greece is not going to run current account surpluses of 3% per year for perpetuity.

Unrealistic Debt

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Email From US Special Forces Veteran; 500 US Blackwater Mercenaries in Ukraine? US Backs Ukrainian Neo-Nazis

Courtesy of Mish.

US Special Forces in Ukraine?

In response to US Special Forces in Mariupol? I received an interesting email from “Dan” a 23-year Army veteran with four years in special services.

Dan writes …

I was a soldier in the US Army for 23 years including four years in Special forces Stationed in Germany. I would agree that there is a strong likelihood that this is a US Special Forces soldier.

I can tell you that we were issued AK 74s and would use them on a mission such as this. That is about all I would really want to say at this point.

It is obvious to me that our strategy is the Balkanization of the various hot spots in the world, Syria, Ukraine, Iraq and so forth.

You can call me if you want I’d be happy to talk with you. All the Best

I did call Dan. We chatted a bit. He pointed out special fireproof gloves on the soldier.

I asked him about the rifles. Dan had high praise for them. “Exceptional” was the exact word. They  are widely distributed to special forces units in Europe.

Dan was “disgusted” with US operations stirring up trouble in numerous hotspots including Ukraine.

More English Speaking Soldiers in Mariupol

Over the weekend more videos of English speaking soldiers in Mariupol turned up. Around the 14:40 mark, talk is in English. This time it sounds British rather than US.

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A Fresh Look at Stock Market Sentiment

A Fresh Look at Stock Market Sentiment

Courtesy of , TraderFeed



I recently took a look at changes in the number of shares outstanding of the SPY ETF as a sentiment measure.  When traders are bullish, shares are created in the ETF; when they are bearish, shares are redeemed.  This is a useful sentiment gauge, because it reflects what traders are actually doing in the market, not just their stated sentiment.  

What is interesting is that we have seen considerable share redemption in SPY since the end of the year.  Indeed, shares outstanding are down on a 5, 10, and 20-day basis.  Since 2012, we've had 23 non-overlapping periods of such share redemption.  Ten days later, SPY was up 18 times, down 5 for an average gain of 1.18%, compared with an average 10-day gain of .43% for all other occasions during that period. 

Although we are not so far from all-time highs in SPY and have bounced well off recent lows, bearishness on this measure continues.  Interestingly, the put/call ratio for all listed U.S. equities has been above .90 for the last two trading sessions, also above average.  

As noted yesterday, I have concerns about the longer-term pattern of breadth among U.S. stocks.  One reason for tracking different market measures is that we can avoid confirmation bias by observing when things are not lining up.  Right now, sentiment is not lining up with a picture of a topping market.  There are times when flexibility is as important as conviction:  a big edge in markets is retaining the option of not trading and waiting for clarity before placing bets.

Further Reading:  Options-Based Sentiment

It’s Not The Greeks Who Failed, It’s The EU

Courtesy of The Automatic Earth

Matson Aircraft refueling at Semakh, British Mandate Palestine 1931

In what universe is it a good thing to have over half of the young people in entire countries without work, without prospects, without a future? And then when they stand up and complain, threaten them with worse? How can that possibly be the best we can do? And how much worse would you like to make it? If a flood of suicides and miscarriages, plummeting birth rates and doctors turning tricks is not bad enough yet, what would be?

If you live in Germany or Finland, and it were indeed true that maintaining your present lifestyle depends on squeezing the population of Greece into utter misery, what would your response be? F##k ‘em? You know what, even if that were so, your nations have entered into a union with Greece (and Spain, and Portugal et al), and that means you can’t only reap the riches on your side and leave them with the bitter fruit. That would make that union pointless, even toxic. You understand that, right?

Greece is still an utterly corrupt country. Brussels knows this, but it has kept supporting a government that supports the corrupt elite, tried to steer the Greeks away from voting SYRIZA. Why? How much does Brussels like corrupt elites, exactly? The EU, and its richer member nations, want Greece to cut even more, given the suicides, miscarriages, plummeting birth rates and doctors turning tricks. How blind is that? Again, how much worse does it have to get?

Does the EU have any moral values at all? And if not, why are you, if you live in the EU, part of it? Because you don’t have any, either? And if you do, where’s your voice? There are people suffering and dying who are part of a union that you are part of. That makes you an accomplice. You can’t hide from that just because your media choose to ignore your reality from you.

And it doesn’t stop there. It’s not just a lack of morals. The powers that be within the EU deliberately unleashed shock therapy on Greece – helped along by Goldman Sachs and the IMF, granted -. All supra-national organizations tend towards zero moral values. It’s inherent in their structures. We have NATO, IMF, World Bank, EU, and there’s many more. It’s about the lack of accountability, and the attraction that very lack has for certain characters. Flies and honey.

So that’s where I would tend to differ from people like Alexis Tsipras and Yanis Varoufakis, the man seen as SYRIZA’s new finance minister, and also the man who last night very graciously, in the midst of what must have been a wild festive night in Athens, responded to my congratulations email, saying he knows what Dr Evil Brussels is capable of. I don’t see trying to appease Brussels as a successful long term move, and I think Athens should simply say thanks, but no, thanks. But I’m a writer in a glass tower, and they have to face the music, I know.

But let’s get a proper perspective on this. And for that, first let’s get back to Steve Keen (you now he’s a personal friend of The Automatic Earth). Here’s what I think is important. His piece last week lays the foundation for SYRIZA’s negotiations with the EU better than anything could. Steve blames the EU outright for the situation Greece is in. Let’s see them break down the case he makes. And then talk.

It’s All The Greeks’ Fault

Politically paralyzed Washington talked austerity, but never actually imposed it. So who was more successful: the deliberate, policy-driven EU attempt to reduce government debt, or the “muddle through” USA? [..]muddle through was a hands-down winner: the USA’s government debt to GDP ratio has stabilized at 90% of GDP, while Spain’s has sailed past 100%. The USA’s macroeconomic performance has also been far better than Spain’s under the EU’s policy of austerity.

[..] simply on the data, the prima facie case is that all of Spain’s problems – and by inference, most of Greece’s – are due to austerity, rather than Spain’s (or Greece’s) own failings. On the data alone, the EU should “Cry Uncle”, concede Greece’s point, stop imposing austerity, and talk debt-writeoffs – especially since the Greeks can argue that at least part of its excessive public debt ratio is due to the failure of the EU’s austerity policies to reduce it.

[..] why did austerity in Europe fail to reduce the government debt ratio, while muddle-through has stabilized it in the USA? .. the key factor that I consider and mainstream economists ignore—the level and rate of change of private debt. The first clue this gives us is that the EU’s pre-crisis poster-boy, Spain, had the greatest growth in private debt of the three—far exceeding the USA’s. Its peak debt level was also much higher—225% of GDP in mid-2010 versus 170% of GDP for the USA in 2009

[..] the factor that Greece and Spain have in common is that the private sector is reducing its debt level drastically – in Spain’s case by over 20% per year. The USA, on the other hand, ended its private sector deleveraging way back in 2012. Today, Americans are increasing their private debt levels at a rate of about 5% of GDP per year—well below the peak levels prior to the crisis, but roughly in line with the rate of growth of nominal GDP.

[..] the conclusion is that Greece’s crisis is the EU’s fault, and the EU should “pay” via the debt write-offs that Syriza wants – and then some.

That’s not the attitude Berlin and Brussels go into the talks with Tsipras and Varoufakis with. They instead claim Greece owes them €240 billion, and nobody ever talks about what EU crap cost the PIIGS. But Steve is not a push-over. He made Paul Krugman look like a little girl a few years ago, when the latter chose to volunteer, and attack Steve on the issue, that – in a few words – banks have no role in credit creation.

Back to Yanis. The right wing Daily Telegraph, of all places, ran a piece today just about fully – and somewhat strangely – endorsing our left wing Greek economist. Ain’t life a party?

Yanis Varoufakis: Greece’s Future Finance Minister Is No Extremist

Syriza, a hard left party, that outrightly rejects EU-imposed austerity, has given Greek politics its greatest electoral shake-up in at least 40 years.

Hold, wait, don’t let’s ignore that 40 years ago is when Greece ended a military dictatorship. Which had been endorsed by, you know, NATO, US … So “greatest electoral shake-up” is a bit of a stretch. To say the least. There was nothing electoral about Greece pre-1975.

You might expect the frontrunner for the role of finance minister to be a radical zealot, who could throw Greece into the fire He is not. Yanis Varoufakis, the man tipped to be at the core of whatever coalition Syriza forges, is obviously a man of the left. Yet through his career, he has drawn on some of the most passionate advocates of free markets. While consulting at computer games company Valve, Mr Varoufakis cited nobel-prize winner Friedrich Hayek and classical liberal Adam Smith, in order to bring capitalism to places it had never touched.

[..] while Greece’s future minister is a fan of markets in many contexts, it is apparent that he remains a leftist, and one committed to the euro project. Speaking to the BBC on Monday, he said that it would “take an eight or nine year old” to understand the constraints which had bound Greece up since it “tragically” went bankrupt in 2010. “Europe in its infinite wisdom decided to deal with this bankruptcy by loading the largest loan in human history on the weakest of shoulders, the Greek taxpayer,” he said.

“What we’ve been having ever since is a kind of fiscal waterboarding that have turned this nation into a debt colony,” he added. Greece’s public debt to GDP now stands at an eye watering 175%, largely the result of output having fallen off a cliff in the past few years. Stringent austerity measures have not helped, but instead likely contributed.

That last line, from a right wing paper? That’s the same thing Steve Keen said. Even the Telegraph says Brussels is to blame.

It will likely be Mr Varoufakis’ job to make the best of an impossible situation. The first thing he will seek to tackle is Greece’s humanitarian crisis. “It is preposterous that in 2015 we have people that had jobs, and homes, and some of them had shops until a couple of years ago, that are now sleeping rough”, he told Channel 4. The party may now go after multinationals and wealthy individuals that it believes do not pay their way.

[..]The single currency project has fallen under heavy criticism. The economies that formed it were poorly harmonised, and no amount of cobbling together could make the end result appear coherent. Michael Cembalest, of JP Morgan, calculated in 2012 that a union made up of all countries beginning with the letter “M” would have been more workable. The same would be true of all former countries of the Ottoman Empire circa 1800, or of a reconstituted Union of Soviet Socialist Republics, he found.

That’s just brilliant, great comparisons. Got to love that. And again, it reinforces my idea that the EU should simply be demolished, and Greece should not try and stay within eurozone parameters. It may look useful now, but down the line the euro has no future. There’s too much debt to go around. But for SYRIZA, I know, that is not the most practical stance to take right now. The demise of the euro will come in and of itself, and their immediate attention needs to go to Greece, not to some toxic politics game. Good on ‘em. But the fact remains. The euro’s done. And SYRIZA, whether it likes it or not, is very much an early warning sign of that.

[..] A disorderly break up would almost certainly result in a merciless devaluation of whatever currency Greece launched, and in turn a default on debt obligations. The country would likely be locked out of the capital markets, unable to raise new funds. As an economy, Greece has only just begun to see output growth return. GDP still remains more than 26% below the country’s pre-crisis peak. A fresh default is not the lifeline that Greece needs.

Instead, it will be up to a Syriza-led government to negotiate some sort of debt relief, whether that be in the form of a restructuring, a deal to provide leeway on repayment timings, or all out forgiveness. It will be up to Mr Varoufakis – if he is selected as finance minister – and newly sworn in Prime Minister Alex Tspiras to ensure that this can be achieved without Greece getting pushed out of the currency bloc in the process.

And whaddaya know, Steve Keen finishes it off too. Complete with history lessons, a take-and-shake down of failed economic policies, and a condemnation of the neo-liberal politics that wrecked Greek society so much they voted SYRIZA. It’s not rocket politics…

Dawn Of A New Politics In Europe?

About 40 years ago, one of Maggie Thatcher’s chief advisors remarked that he wouldn’t be satisfied when the Conservative Party was in government: he would only be happy when there were two conservative parties vying for office. He got his wish of course. The UK Labour Party of the 1950s that espoused socialism gave way to Tony Blair’s New Labour, and the same shift occurred worldwide, as justified disillusionment about socialism as it was actually practiced—as opposed to the fantasies about socialism dreamed up by 19th century revolutionaries—set in.

Parties to the left of the political centre—the Democrats in the USA, Labour in the UK, even the Socialist Party that currently governs France—followed essentially the same economic theories and policies as their conservative rivals.

Differences in economic policy, which were once sharp Left-anti-market/Right-pro-market divides, became shades of grey on the pro-market side. Both sides of politics accepted the empirical fact that market systems worked better than state-run systems. The differences came down to assertions over who was better at conducting a pro-market economic agenda, plus disputes over the extent of the government’s role in the cases where a market failure could be identified.

So how do we interpret the success of Syriza in the Greek elections on Sunday, when this avowedly anti-austerity, left-wing party toppled the left-Neoliberal Pasok and right-Neoliberal New Democracy parties that, between them, had ruled Greece for the previous 4 decades? Is it a return to the pro-market/anti-market divides of the 1950s? No—or rather, it doesn’t have to be.

It can instead be a realisation that, though an actual market economy is indeed superior to an actual centrally planned one, the model of the market that both sides of politics accepted was wrong. That model—known as Neoliberalism in political circles, and Neoclassical Economics in the economic ones in which I move—exalts capitalism for a range of characteristics it doesn’t actually have, while ignoring characteristics that it does have which are the real sources of both capitalism’s vitality and its problems.

Capitalism’s paramount virtues, as espoused by the Neoliberal model of capitalism, are stability and efficiency. But ironically, the real virtue of capitalism is its creative instability—and that necessarily involves waste rather than efficiency. This creative instability is the real reason it defeated socialism, while simultaneously one of the key reasons socialism failed was because of its emphasis upon stability and efficiency.

[..] real-world capitalism trounced real-world socialism because of its real-world strength—the creative instability of the market that means to survive, firms must innovate—and not because of the Neoliberal model that politicians of both the Left and the Right fell for after the collapse of socialism.

Neoliberalism prospered in politics for the next 40 years, not because of what it got right about the economy (which is very little), but because of what it ignored—the capacity of the finance sector to blow a bubble that expanded for almost 40 years, until it burst in 2007. The Neoliberal model’s emphasis on making the government sector as small as possible could work while an expanding finance sector generated the money needed to fuel economic prosperity. When that bubble burst, leaving a huge overhang of private debt in its wake, Neoliberalism led not to prosperity but to a second Great Depression.

The Greeks rejected that false model of capitalism on Sunday—not capitalism itself. The new Syriza-led Government will have to contend with countries where politicians are still beholden to that false model, which will make their task more difficult than it is already. But Syriza’s victory may show that the days of Neoliberalism are numbered. Until Sunday, any party espousing anything other than Neoliberalism as its core economic policy could be slaughtered in campaigning by pointing out that its policies were rejected by economic authorities like the IMF and the OECD.

Syriza’s opponents did precisely that in Greece—and Syriza’s lead over them increased. This is the real takeaway from the Greek elections: a new politics that supports capitalism but rejects Neoliberalism is possible.

All Europeans, and Americans too, must now support SYRIZA. It’s not only the only hope for Greece, it is that for the entire EU. SYRIZA breaks the mold. Greeks themselves would be terribly stupid to start taking their money out of their accounts and precipitating bank runs. That’s what the EU wants you to do, create mayhem and discredit the younger generation that took over this weekend.

It’s going to be a bitter fight. The entrenched powers, guaranteed, won’t give up without bloodshed. SYRIZA stands for defeating a model, not just a government. Most of Europe today is in the hands of technocrats and their ilk, it’s all technocrats and their little helpers. And it’s no just that, it’s that the neo-liberal Brussels crowd used Athens as a test case, in the exact same way Milton Friedman and his Chicago School used the likes of Videla and Pinochet to make their point, and tens of thousands got murdered in the process.

It’s important that we all, European or not, grasp how lacking in morality the entire system prevalent in the west, including the EU, has become. This shows in East Ukraine, where sheer propaganda has shaped opinions for at least a full year now. It’s not about what is real, it’s about what ‘leaders’ would like you to think and believe. And this same immorality has conquered Greece too; there may be no guns, but there are plenty victims.

The EU is a disgrace, a predatory beast unleashed upon all corners of Europe that resist central control and, well, debt slavery really, if you live on the wrong side of the tracks.

SYRIZA may be the last chance Europe has to right its wrongs, before fighting in the streets becomes an everyday reality. Before we get there, and I don’t know that we can prevent it, hear Steve Keen: it’s not the Greeks that screwed up, it’s the EU. But they would never ever admit to that.

Scientists figure out to unboil an egg


Scientists unboil an egg, and it may be a big deal

By Robert Ferris, at

It may seem like a mere parlor trick, but it is an achievement that could "dramatically" cut costs for cancer treatments, food production and other research in the $160 billion global biotechnology industry, according to a press release that was posted online Friday.

It also means "unboil" is now a word.

As anyone who has ever cooked an egg knows, egg "whites" are clear until they are cooked. Egg whites are high in protein, and when they cook, the proteins start to unfold, and then fold back up in a tighter, more tangled structure. This is why they go from being clear and mucus-like to white and rubbery.

Researchers at the University of California, Irvine, and Flinders University in Australia have figured out a process that can pull apart the tangled proteins, allowing them to refold and return to their original structure.

Keep reading Proteins and research: Scientists figure out to unboil an egg.


Next up: Scientists turn a chicken back into an egg…

Picture via Pixabay. 


Swiss Franc Yield Curve Negative for 12 Years; Bond Crash – Austrian Bank Raiffeisen; Another One Bites the Dust

Courtesy of Mish.

The casualties continue to pile up in the wake of the Swiss National Bank dropping its peg to the euro.

(See Rabbit Hole Intervention Fails: Wild Moves in Swiss Franc as Switzerland Abandons Euro Peg; Morals of the Story).

The first moral of the story was “Don’t borrow money in other currencies, especially long-term mortgages.

The same applies to lenders. And banks that lent money in unhedged Swiss francs to customers in Poland, Hungary or elsewhere now finds collection difficult.

Austrian bank Raiffeisen is in deep trouble doing just that.

Austrian Bank Raiffeisen’s Bonds Crash

Bloomberg reports Raiffeisen Debt Signaling Distress as Currency Woes Mount

Raiffeisen Bank International AG (RBI)’s junior bonds slumped to levels typically viewed as distressed after gains in the Swiss franc added to woes triggered by the tumble in the Russian and Ukrainian currencies.

Subordinated bonds sold by the Vienna-based lender slid as low as 63.4 cents on the euro, with yields of as much as 10 percent, after trading at 91 cents at the start of December, according to data compiled by Bloomberg.

Investors are concerned because European Union rules forcing losses on junior bondholders before banks can get state aid came into force in Austria on Jan. 1. The government has injected about 8.1 billion euros into three banks in the past six years and guarantees on bonds of stricken Hypo Alpe Adria Bank were revoked to avoid a taxpayer-funded bailout.

Raiffeisen had a total of 4.3 billion euros of Swiss franc loans outstanding as of September 2014, according to estimates by Moody’s Investors Service. The largest part of these are in Poland, where the franc has appreciated 17 percent against the zloty since Jan. 14, threatening to push up defaults on the bank’s 2.9 billion euros of mortgages in the Swiss currency.

Ruble Losses

Interestingly, Raiffeisen is also the third-biggest foreign bank in Russia after Societe Generale SA  and UniCredit SpA….

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This Is What It Means To Lose A Currency War


This Is What It Means To Lose A Currency War

Courtesy of John Rubino

The term gets tossed around a lot, but the meaning and consequences of a “currency war” aren’t intuitively clear to most people. Especially confusing is the idea that you lose the war when your currency goes up. The suddenly very strong dollar, for instance, should, one would think, be a good thing, since it seems to imply that the rest of the world is impressed enough to covet our currency.

That’s true in a sense, but in another sense — and beyond a certain point — it becomes a potentially huge problem, because a strong currency makes exports (priced in dollars) more expensive and therefore a tougher sell. Consider today’s headlines:

Commodities rout slows Caterpillar
CHICAGO (Reuters) – Caterpillar Inc on Tuesday reported lower quarterly net profit that missed expectations as lower prices for copper, coal and iron ore hurt mining equipment orders, and warned the recent fall in oil prices would make for a difficult year in 2015. The report sent the company’s shares down nearly 6 percent in premarket trading.

Plunging profits have sent shares of Microsoft tumbling
Microsoft shares slid more than 7.6% in pre-market trading after second-quarter earnings showing a dip in earnings. Microsoft reported earnings per share of 71 cents, meeting estimates but falling below the 78 cents reported during the same quarter last year.

Procter & Gamble Profit Down 31%, Hurt by Exchange Rates
Procter & Gamble’s second-quarter earnings sank 31 percent as the strong U.S. dollar cut into the performance of the world’s largest consumer products maker.

The Cincinnati company, which sells products ranging from Tide detergent to Crest toothpaste, said Tuesday that exchange rates will remain a challenge well into fiscal 2015, especially in the second half of its year. Overall, it expects foreign exchange to chop its core, fiscal 2015 earnings by 12 percent and reduce its revenue by 5 percent.

And why should we care about falling corporate profits?

Wall Street tumbles with Microsoft, Caterpillar; data weighs
NEW YORK (Reuters) – U.S. stocks fell sharply on Tuesday, with Microsoft and Caterpillar shares tumbling after quarterly results, while an unexpected decline in durable goods orders also weighed on sentiment.

Many multinational companies have posted disappointing results and forecasts, with the stronger dollar a common culprit.

Adding to earnings concerns, a gauge of U.S. business investment plans unexpectedly fell in December, a potential sign that slowing global growth and falling crude oil prices were starting to have an impact on the economy.

So this is what it means to lose a currency war: plunging corporate profits, falling stock prices, a slowing economy, rising layoffs. Then, when the reality of a weaker economy reaches Main Street, angry voters, difficult elections, and regime change. This last part is of course unacceptable to the people managing economic policy and is why virtually no one can accept defeat in such a conflict.

So…a few more days like this and expect a parade of Fed, Treasury and congressional talking heads to float the idea of cancelling those promised interest rate hikes and, just maybe, returning into the good old days of QE Infinity.

Visit John's Dollar Collapse blog here > 


How Capitalism Dies

Courtesy of Bill Bonner via Acting-Man

Two Comedy Acts

Today, we’re going to tell you why America’s middle class is getting poorer. Or put another way, we’re going to show you how capitalism dies.

Two comedy acts appeared last week: President Obama’s State of the Union address and Mario Draghi’s QE announcement.

Mr. Obama claimed credit for a “recovery” that has left the typical American poorer than he was before. And not only is he poorer, but also he is more dependent on the very people who engineered the phony recovery. (See below.)

Mr. Draghi followed up with a series of one-liners, the gist of which was that he now proposes to save Europe from the specter of inadequate inflation.

casino royale-1

Europe’s casino boss. Photo credit: Roesseler/EPA

ECB to the Rescue

Who could take Draghi seriously? After all, what’s wrong with stable prices? Nothing at all! The 19th century had fairly stable prices… as well as the fastest GDP and wage growth in human history. Serious consumer price inflation didn’t begin in the US until the 1970s, when America’s new flexible, adaptable, expandable, super-duper fiat money came into service.

Since then, the cost of living in the US is up roughly 600%. And the rate of economic growth has fallen. Mr. Draghi did not mention these facts when he announced his euro-debasement program. But it hardly mattered. The real purpose of euro-zone QE is the same as the real purpose of the US version – to prevent the cronies from getting what they deserve.

They own hundreds of billions of euro worth of European sovereign bonds – now trading at the highest prices and lowest yields in recorded history. Many were bought with negative yields. And now, with aging populations, rising debt levels, gummed-up regulations, rising living costs, rising taxes and falling revenues, there is almost no way these bonds can be worth what speculators paid for them.

How are the insiders going to get their money back? The ECB to the rescue! It promises to transfer $1.3 trillion to the financial elite over the next 21 months – buying sovereign bonds and other slippery obligations at the rate of €60 billion ($67 billion) every month. Not that we are complaining; we’ve got a sense of humor!

Besides, we’re card-carrying members of the 1%… and happy to get a share of the loot. If only we had bought those Italian sovereign bonds! So, there you have it…

In the New World, the commander-in-chief claims credit for something he didn’t do. In the Old World, the central-banker-in-chief claims to be doing something not worth doing. Neither is doing what he should do.

Germany, 2 yr. yield

Germany’s 2 year note now sport a yield to maturity of minus 0.143%. All over the developed world, more than $ 4 trillion in sovereign debt are now trading at negative yields. This is no longer just return-free risk, it is at the next stage where you have to pay for the risk to lend money to governments that in a sober assessment cannot be called anything but effectively insolvent – click to enlarge.

America’s Disappearing Wealth Creators

We chuckle … and move on. We were supposed to tell you about how it was possible for the average American to get poorer at a time that should have been the most productive and prosperous ever. We won’t disappoint you.

Who makes people better off? President Obama? Mario Draghi? Can you think of a single thing a politician or central banker has contributed to the welfare of the world? We can’t.

Did they invent hamburgers? Did they pave roads? Did they produce wheat or lay bricks? We’re exaggerating to make our point. They are, no doubt, amusing at dinner parties. And they pet their dogs.

But sticking to the material world, the world of getting and spending, has a president or central banker ever put in a decent day’s work or added a single centime or farthing to the nation’s GDP? Not that we know of. Then who has?

If we had to put a title on this little discussion, we might call it: “America’s Disappearing Wealth Creators.” Or if we wanted to be more lurid: “How the Zombies Ate America’s Entrepreneurs.”

Last week, we reported on how more and more people depend on the US federal government for their daily bread. Here’s the chart from American Enterprise Institute’s Nicholas Eberstadt:


Dependence on government – the one true growth industry left

As the number of zombies increases, it leaves fewer people creating real jobs, building real businesses and paying real taxes.

In short, the people who create wealth are vanishing.

Jim Clifton, the chairman of Gallup, reports that, for the first time ever, there are more US businesses closing than starting up:

“There continues to be a direct link between market cap (which measures the total value of all outstanding shares) and performance. The US now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel and Italy all have higher startup rates than America does.

We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.

The US Census Bureau reports that the total number of new business startups and business closures per year – the birth and death rates of American companies – has crossed for the first time since the measurement began.

I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying.”


US business start-up and closings – an ominous crossover.

In the early 1970s, there were about 200,000 new US businesses created each year (net of closures). Now, the number is negative. Why are Americans getting poorer?

Look no further. No new businesses (net). No new jobs (again net). No new wealth. Under Obama and Draghi, crony capitalism flourishes. Real capitalism dies.

Beware The Correction Of False Prices

Beware The Correction Of False Prices 

Courtesy of Charles Gave of Gavekal Dragonomics

I want to start this paper by reiterating a few of my strongly held convictions about the role of central bankers:

  • Economics is a branch of logic, itself a branch of philosophy, and not a branch of astrology (the good case) or mathematics (the bad case).
  • So when I see the guardians of the Temple of Mammon—otherwise known as central bankers—following an illogical policy, I am mesmerized. I start to have doubts, either about my ability to follow a path of logical reasoning, or about the sanity of the current breed of central bankers. As far as the first option goes, our readers can decide, and the market will be the ultimate judge. As for the second, allow me to make a few remarks…

Four basic postulates for central bankers

To think ‘logically’ one generally starts with a few postulates learnt from experience. What should these postulates be for central bankers?

  1. I expect central bankers to know that the future is unknowable. This has been generally accepted wisdom at least since the time of the New Testament: “But of that day and hour knoweth no man.”
  2. Since Karl Popper, central bankers should know that the amount of risk in a system is roughly constant over time and that any effort to minimize risk or volatility at any point in time (usually just before an election) will lead to its more forceful re-emergence later on (hopefully after the election). In this sense an economic system is much like one of Alexander Calder’s mobiles: if you restrict the motion of one of its branches, any disturbance of the system will lead to much bigger movements elsewhere.
  3. Since Knut Wicksell, central bankers should know that the greater the difference between the ‘natural’ interest rate and the ‘market’ rate, the bigger the subsequent booms and busts. If sustained, a false price for the cost of money increases the risk in a system exponentially. A false price for interest rates leads to a false price for the exchange rate. From there all prices become false and the economy moves ex-growth, usually after a boom built on leverage and marked by a sharp rise in assets prices, followed by a bust when the carry traders get killed (as in the US housing market between 2002 and 2007).
  4. If a commercial bank is in difficulty, as a central banker I nationalize it. I guarantee all the depositors, I value the bank’s bonds and equity at zero, I recapitalize it and after five years I float it on the stock market once again, making five times my money. Finally I put the bankers in jail. In no circumstances do I protect the bankers, which would just guarantee economic stagnation for at least the next 20 years (compare Sweden in 1992 with Japan in 1992). 

Once equipped with this formidable knowledge, there are a number of things that a ‘logical’ central banker should never do:

1) He (or she) should never give forward guidance about his future actions to anybody—ever. To see why, let us assume that a well intentioned central banker guarantees market participants that he will not raise short rates for the next three years. In doing so, he is implying that he can see three years into the future, which is either idiocy or insanity (see the previous page). The extraordinary thing is that market participants, who know this guidance is idiotic, clamor for more and more of it, on the dubious pretext that if that guarantee were to be withdrawn, the markets would collapse. BS of a high order!

2)  If adhered to, this policy of ‘forward guidance’ would massively reduce the risks for borrowers over the next three years, so reducing risk on the liability side of leveraged positions. As a consequence it would benefit those that are closest to the central bank first, leading to a misallocation of capital through the ‘Cantillon effect’ (see The Cantillon Effect (And The Inevitable Demise of Financials)).

3)  This form of forward guidance leads to ever-increasing leverage in the system, with the borrowed money used to buy existing assets with a cash flow higher than the cost of servicing the debt. The price of all assets goes up, and since assets are held by ‘rich’ people, not by poor people, the rich get richer. But the rich tend to buy existing assets—not build new assets, which by definition have uncertain cash flow—so the national stock of capital does not rise. As a result, productivity falls, the structural growth rate of the economy declines, and the poor get poorer. The Gini coefficient explodes, and society becomes more and more unstable.

4)  If we believe Popper [above], the apparent reduction of risk today from forward guidance will lead to a massive increase in risk later. Since market participants will be more leveraged, when the bust eventually hits, the downturn will be bigger and society will end up poorer (again see the US housing sector; almost a text book example of what to expect when a central bank establishes a false cost of money).

5)  Heeding Wicksell, or just common sense, central bankers should refrain from having a view on the price of money and should simply order their computers to keep short rates (e.g. Fed funds) 50bp below nominal GDP growth—permanently. If a crisis strikes because the stock market has become overexcited, they might consider, as Walter Bagehot advised, providing liquidity in infinite amounts but at a price, which for up to a year, but no longer, could be below my rule of thumb for short rates. Under no circumstances should central bankers attempt to manipulate long term interest rates or exchange rates, since they are not smart enough to understand the long term implications of those manipulations. If another country’s central bankers wants to try, fine. Every country has a right to do stupid things if it wants. 

These are more or less the precepts that Paul Volcker followed after 1983, and Alan Greenspan during his first two terms.

Unfortunately, the policies that the current crop of central bankers are following are the exact opposite of what a logical central banker should do. This leads me to ask two questions:

  1. Not very interesting but important to answer: Why are central bankers behaving so illogically?
  2. Much more interesting, but alas almost impossible to answer: How is this going to end? And what patterns will I need to recognize to know that we are approaching the hour when the fat lady starts to sing?

I have come across quite a few possible answers to the first question. In no particular order of sanity:

  • The central bankers really do believe that they can forecast the future. This is the old ‘fatal conceit’ of Friedrich Hayek. We had a perfect example of such a belief when ‘scientific socialism’ was in vogue. The result was the untimely deaths of 100mn innocent people.

  • The central bankers are in the hands of the plutocrats and are following policies that favor their interests. If true, this is a political problem, to be dealt with by elected politicians. An audit of the central bank would go a long way to dispel suspicions.

  • The central bankers are in thrall to a political project which requires them to follow a policy that cannot work. Taking the euro as an example, it is obvious that within euroland there are different natural rates, so there should be different actual rates. A common interest rate will be too high for some countries and too low for others, so the system will keep diverging until it finally explodes. No amount of quantitative easing will ever work.

  • A new school of economic thought is emerging which we might call ‘touchy-feely Freudian Keynesianism’. For the economy to grow we need entrepreneurs to exhibit strong ‘animal spirits’. The way to develop this remarkable quality is for the central bankers to keep telling them that they can borrow money at a subsidized cost, which is proof that the central bankers really, really, love them (Freud). This is astoundingly stupid, since if the money is subsidized for me, it is also subsidized for my competitors, which guarantees that we will all go bust eventually. The logical reaction is therefore to stop borrowing and investing now, in order to maximize the cash flow I can get from my business, my ultimate goal being to shut up shop down the road.

  • The central bankers are clearly incompetent, never having worked in the real world. A common scenario—we have had plenty over history (names provided on request). The solution is to change the way we select our central bankers. In the US every time our central banker has had a PhD in economics, the story has ended badly. So perhaps we should exclude PhDs and hire farmers or small businessmen instead? 

I am sure the reader can think of other explanations: groupthink, a shortage of maternal love, bitter sibling rivalry etc… But trying to understand why people act stupidly is a thankless and largely hopeless task. The 18th Century French theologian Jacques-Benigne Bossuet summed it up best: “God laughs at those who deplore the effects of the causes that they cherish.”

In this case the effects are false prices where ever we look. As I shall never tire of explaining, if you manipulate interest rates and exchange rates, you will create false prices all over the place, since interest rates and exchange rates are the prices which determine all others.

Today we have false prices all over the world. Recently, some of these false prices have started to return to their long term equilibrium levels. Since a lot of money was invested at the old ‘false’ prices, when this happens large amounts of money are lost in a very short period of time, which tends to be very recessionary.

Firstly, the return to market-determined prices is always and everywhere recessionary. Secondly, in today’s world it is deflationary to boot. For example, the de-pegging of the Swiss franc is deflationary for Switzerland, but also for the rest of the world since a lot of money has been lost and these losses imply a lower banking multiplier in so far as the leverage was financed by commercial banks.

Another false price was the price of a barrel of oil. In the past I often mentioned the relationship between negative real rates in the US and the rising price of oil. Then, when the Fed announced it was ready to raise short rates, the price of oil started to tumble. Surely this is no coincidence. The fall in oil prices is massively deflationary and recessionary for the producers, and kind of expansionary for the consumer, providing of course that commercial banks do not go bust in the middle, having lent tons of money to the oil producers.

Today the yen is certainly at a false price, being more than two standard deviations undervalued relative to its purchasing power parity against the US dollar. Right now I would not hedge the yen.

Ever since 2002, the Fed has relentlessly manipulated the US dollar downwards, to the point where, according to the Bank for International Settlements, US$9trn have been borrowed by people or entities with no cash flow in dollars. With the US current account deficit (the only primary source of earned reserves) contracting sharply, covering US$9trn in short sales is going to be interesting to watch.

Then we have the mother of all false prices: the Euro. In the financial sphere, no euro-denominated price is market-determined, from the exchange rate (the euro is far too weak for Germany and far too strong for Italy) to interest rates (if anybody believes that long rates in euroland are at market prices, please tell me your definition of a market price), to the share prices of financials, insurance companies and utilities threatened with bankruptcy by zero or negative interest rates, to pension funds unable to compute the present value of their assets and liabilities. 

Gold, the canary in the coal mine, has probably seen its price manipulated by central bankers who did not want the population to be alarmed because that could have had an impact on the ‘animal spirits’ of the entrepreneurs. If I were managing money for French, Spanish or Italian clients, I would own positions in gold, but not if I were managing money on behalf of US, German, Chinese or Japanese clients.

Stock markets are probably vulnerable because central bankers have told market participants that they would stamp out the tail risk, and if necessary would buy directly (see the Bank of Japan); a false price if I ever saw one.

So my advice is either to use the false prices to play a return to market- determined prices—long the US dollar, long medium duration US government bonds, short medium duration French bonds—or to invest in regions which are attempting to re-establish market-determined prices, such as Asia under Chinese leadership.

Once again: we always return to market prices and these returns are both recessionary and deflationary. So fasten your seat belts. The return to market-determined prices has probably already started. 

Republished with Permission from Charles Gave. 

© Gavekal Ltd. Redistribution prohibited without prior consent. This report has been prepared by Gavekal mainly for distribution to market professionals and institutional investors. It should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. 

[Pictures via Pixabay: the Solar System is here, the weather vane is here and the Euro is here.  Laughing Buddha source here.  ~ Ilene]


Evidence Grows Showing Wall Street as a Negative Economic Force

Courtesy of Pam Martens.

Gallup Study on Negative Business Growth in U.S.Earlier this month, Jim Clifton, Chairman and CEO of Gallup, published a stunning indictment of Wall Street as a job creating engine. Clifton reported that the U.S. now ranks 12th among developed nations in business startups with countries such as Hungary and Italy having higher startup rates. Of equal concern writes Clifton, “American business deaths now outnumber business births.”

Clifton has a theory on why America’s crisis in creating new businesses is a well-kept secret. He writes:

“My hunch is that no one talks about the birth and death rates of American business because Wall Street and the White House, no matter which party occupies the latter, are two gigantic institutions of persuasion. The White House needs to keep you in the game because their political party needs your vote. Wall Street needs the stock market to boom, even if that boom is fueled by illusion.”

A key function of Wall Street is to bring promising new companies to market to ensure that the U.S. remains competitive in new industries and good jobs and innovation. This process is called Initial Public Offerings or IPOs. But the nation was put on notice as far back as 2001 that Wall Street was more snake oil salesman than the locomotive for new business launches. The largest investment banks were calling the startups they were peddling to the public on the Nasdaq stock market “dogs” and “crap” behind closed doors while lauding their virtues in publicly released “research” announcements.

Writing in the New York Times in 2001, Ron Chernow precisely analyzed how the Nasdaq stock market, Wall Street’s primary market for tech startups, had served the country. Chernow wrote:

“Concern has centered on the misery of small investors maimed in the tech wreckage. But what happened to all the money they squandered in the I.P.O.’s? Think of the stock market in recent years as a lunatic control tower that directed most incoming planes to a bustling, congested airport known as the New Economy while another, depressed airport, the Old Economy, stagnated with empty runways. The market has functioned as a vast, erratic mechanism for misallocating capital across America.”

Continue reading here > 


Preview of January FOMC Meeting and Beyond

Courtesy of Marc To Market

The Federal Reserve’s two-day meeting concludes Wednesday.  To the extent the FOMC meeting is ever routine, this should be it.  Its forward guidance evolved at the end of last year.  The “considerable time” between the end of the asset purchase program, which it never called quantitative easing, and the first hike has been replaced with “patience”.  

At Yellen’s first press conference last year, she abandoned the Fed’s purposeful, strategic ambiguity and suggested “considerable time” was around six months.  She again yielded to temptation in December to define “patience” as a couple of meetings.  

The January meeting is covered by that forward guidance.  It is unlikely to change.  The next meeting in March is a different story.  If the Fed wants to prepare the market for a potential rate hike in the middle of the year, the March meeting, which will see updated macro-economic forecasts and a press conference, is more important.  Patience at the March meeting would seem to preclude a June hike. 

Economic activity has unfolded largely as the Federal Reserve anticipated.  Its macro-economic assessment is unlikely to have changed dramatically over the past six week.  There was an unusual large number of dissents at the December meeting.  Not only have those regional presidents surrendered their votes on the FOMC amid the annual rotation, but all three have indicated plans to resign this year. 

The decline in yields at the short-end of the curve, including the Fed funds and Eurodollar futures, suggest that the consensus expected a June hike may be fraying.  There are three reasons for the creeping doubts, and they are related to each of the Fed’s three mandates:  price stability, full employment, and financial stability. 

At heart of the matter are developments in Europe.  The dramatic decline in the euro and European interest rates is spurring a strong dollar rally.  The dollar’s appreciation will, the argument maintains, will undermine US exports and growth, slowing progress in the labor market.  The dollar’s rally will further depress prices.  The Fed’s preferred measure of inflation has been below target for nearly three years.  The flow of capital out of Europe may endanger US financial stability.

While the economic theory behind these concerns is valid, in practice a more nuanced picture emerges.  And one that may not pose a significant hurdle to a mid-year hike.  The US is the world’s third largest exporter (behind China and Germany), but that is not the primary way US companies service world demand.  For historical and institutional reasons beyond the scope of this short note, US companies service foreign demand primarily by building and selling locally.  The sales by majority owned affiliates of US multinationals abroad will see 4-5x more goods and services than the US exports.  That means that local production takes a larger hit when local demand is weak rather than US-based facilities. 

The US exports about 13% of GDP.  This is relatively low among the high income countries though we should note that Japan, which is often mistakenly said to be export driven, exports about the same as the US as a percentage of GDP.   US exports are near record levels.  The best thing for US exports, if that is one’s focus, is stronger world demand, not necessarily a weaker dollar. 

US officials recognize that Europe and Japan are taking measures that can help to facilitate stronger growth. Through various administrations, the pro-growth stance of the US officials has remained a relative constant.  It is not, of course, that growth solves all the problems, but it does make the problems easier to address.   While the euro area stagnated in the April-September 2014 period, and the Japanese economy contracted, the US experienced its strongest growth in over a decade.  The US economy is expected to have continued to growth above trend in Q4.  That data will be reported at the end of the week. 

Headline inflation in the US is set to fall further under the weight of the decline in energy prices.   A negative year-over-year print cannot ruled out.  The Federal Reserve differs from most other major central banks by targeting what is called core inflation in the US, which excludes food and energy.  Fed officials are well aware that households pay for food and energy.  The reason to exclude them for policy purposes is that they are volatile.  They can obscure the underlying signal. 

For the past half century, headline inflation has converged with core inflation; not the other way around.   The Fed’s leadership has signaled that it would look through the one-off decline in inflation sparked by the fall in energy prices.  The stimulative impact on demand is regarded as more permanent, provided energy prices stay low. 

There may be some bleed through as the drop in energy has some modest knock-on effects on the core rate.  Transportation costs may decline though it is not yet apparent in airfare.  Public transportation costs are administered prices and are unlikely to be cut.  A ride on the New York subway, for example, is about to rise by 10%.  Around 40% of the core basket is accounted for by housing costs, and these do not appear poised to decline. 

The dollar’s appreciation can be expected to exert downward pressure on import prices.  However, much of what the US imports are priced and invoiced in US dollars.  This is an import mitigating factor that is often not appreciated by observers. 

The last time the Fed began a tightening cycle, the core PCE deflator, the Fed targeted rate, was not far from current levels.  Back then, in 2004, the Fed did not have a formal inflation target, but it is instructive nonetheless.   The same is generally true about the unemployment rate.  By mid-year, the national unemployment rate is likely to have fallen further.  In addition, a strong majority of states will also have unemployment levels that economists regard as full employment. 

It is true that the participation rate has fallen.  It appears that retirement and returning to school are two major contributing factors.  There has also been an unusual increase in workers on disability insurance. 

The point is that the Federal Reserve is already showing patience.  The current macro-economic performance in past cycles would have arguably already seen the Fed begin a tightening cycle.  Indeed, part of the dollar’s appreciation is predicated on anticipation of Fed tightening. 

Some observers suggest that the flow of European savings into the US may jeopardize the Fed’s third (and often forgotten) mandate financial stability.  However, they mistakenly think this could deter Fed tightening.  To the contrary, concern about financial stability has been cited by the hawks on the Federal Reserve to hike rates rather than the doves who are concerned about the low levels of inflation. 

There are two other reasons what a June rate hike should not be abandoned yet.  First, the tapering was indicative of the process the Fed is pursuing. It gave investors, businesses and foreign countries several months of advanced warning that it would slow its asset purchases in a measured manner. It did precisely that.  Neither the contraction in Q1 14 GDP nor the acceleration of job growth took it off its course.  The leadership of the Federal Reserve has indicated that it is getting closer to its first hike.  The evolution of the macro-economic data will determine the exact timing, but near midyear, that have said, still look reasonable.  The Fed’s transparency and credibility rests on it saying what it will do and then doing it. 

Second, it is not clear when the next economic downturn will begin though we can feel fairly confident that it will not be this year. The Federal Reserve needs to create the conditions to allow it to cut rates rather than resort to new asset purchases.  In order to do this it needs to raise rates.  This can be parodied as saying rates have to be raised so they can be cut, but it does not do this argument justice. 

The bottom line is that the January FOMC meeting will most likely pass without much impact.  Clearer indication of the Fed’s intention in Q2 will have to wait for the March meeting.  While some are observers are having cold feet, we continue to think that a June hike remains the most likely scenario. If we are wrong, it is that the hike is delivered in September instead.  Regardless of the exact timing, the US economy and the Federal Reserve are well ahead of most of the major central banks in the larger business cycle.  

Time to Focus on Europe?

There is plenty of economic data this week and earnings season is in full swing. Despite this, I suspect that news from Europe will dominate the market discussion.

I expect market participants to be watching closely for The Message from Europe.

Prior Theme Recap

In last week’s WTWA I predicted that there would be a focus on the message from corporate earnings reports. That was very accurate for the week as a whole. The big exception was the ECB celebration and commentary on Thursday. There was plenty of speculation about what the corporate news was telling us about energy price effects, the impact of dollar strength on earnings, and especially the outlook. I expect that to continue this week as well.

Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.

This Week’s Theme

This is an especially difficult week for my regular approach of guessing the theme. I could be completely wrong by the time you read this post on Sunday or Monday. Sometimes you plan, but also remain flexible.

  1. The Greek snap election has important implications for the Eurozone, a possible “Grexit,” changing bailout rules, and policies involving other Eurozone members. Sara Sjolin at MarketWatch has a good account of the issues, the contending parties, and how to interpret the news.
  2. The ECB plan for QE is still actively debated. Most are trying to use the US program as a template to interpret the needed size and potential for success. Dr. Ed is rather skeptical.
  3. The FOMC announces policy at mid-week. Will anyone care?
  4. Earnings season is still in the early stages. Since this provides an independent source of economic data, it will command respect.

These competing themes have a common thread – the influence of Europe on the world economy, corporate earnings, and worldwide central bank policy.

I expect this week’s theme to be A Focus on Europe.

As always, I have some additional ideas in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

In a slow news week there were a few bright spots.

  • China GDP increased 7.4%, beating expectations by 0.1% China has been attempting to alter the nature of its economy with less reliance on exports. We all know that the data may be suspect. The chart below shows the quarterly results for your consideration. The major media sources unanimously put a bearish spin on this report, noting that it was the lowest growth in twenty years. While this is technically accurate, the Chinese economy defies the “hard lending” predictions that are so popular and the real story was the leveling off of the decline. The WSJ article is typical.


  • Earnings news has been positive. 79% of the 90 S&P 500 reporting companies have beaten estimates. 54% have beaten on revenues, which is a bit below the long term average. To my surprise, the market has rewarded the beats more than punishing the losers. So far in this reporting season, my “final thought” warning from last week has been incorrect. (FactSet)
  • Gasoline savings are showing up in spending. This CNBC article has the credit card data as well some charts to illustrate. Restaurants and ecommerce (counter-intuitive?) were the biggest winners.
  • Bullish sentiment declined. Bespoke has the report on the AAII survey. This is one of the charts:

AAII Bullish Sentiment 012215

  • Housing starts rose 4.4%, much better than expected. Scott Grannis notes that the small beat still leaves the growth at discouraging levels.

Housing Starts 68-

  • European QE beat market expectations. This was the story at the end of the day, and I report the market interpretation of the news. When the announcement came, an hour before the market opened, stock futures spiked higher, mostly because the perception was that it was a larger program than expected. It did not take long for that rally to evaporate, and futures decline more than 1% from the high. The problem was that the target numbers were not clear increases since they included existing programs. Later in the day there was some conventional wisdom using the US QE analogy – the old simplistic formula that injecting liquidity had to be good for European stocks. Somehow that translated to a positive for US stocks. On Friday, the conclusion was not so clear.Calculated Risk has a good summary of the immediate reactions. The policy change was widely anticipated, and less important than the Thursday trading suggested. By the end of the day, every journalist was explaining the market move in ECB terms. I wonder how they would have done if required to file stories at the market opening, based on the policy facts, not the market reaction. Put another way, how would traders have done with a copy of the statement in advance.
  • Leading economic indicators increased 0.5%. While this was in line with expectations, it provides reassurance for those who are worried about a recession. One reason for some skepticism about this index is the history of the series, including various revisions.Doug Short has a post on the comparison of the “new” and “old” methods, showing the long-term gap. Given his conclusions, is there still value in the series? Georg Vrba, continuing his strong quantitative work analyzed the LEI series. Please note that he regards this as inferior to his proprietary methods, which we often cite in the quant corner. His point here is that you can find power from a simple, publicly available data series, if you let the data speak to you.

Conf Bd LEI growth rate Jan-2015

The Bad

The bad news included some significant economic reports.

  • State of the Union. To emphasize, I am not interested in the partisan politics nor am I advocating particular policies. There is a simple test: Is this market-friendly news. The market would celebrate more cooperation, progress on immigration, and corporate tax reform, to pick a few examples. Little of this was expected of the speech, as I noted last week, so there was not much reaction.
  • Forward earnings estimates continue to decline. FactSet notes that the forward multiple for the S&P 500 is now 16.6 versus 16.2 at the beginning of the quarter. The forward P/E for the energy sector remains higher than its historical average. Brian Gilmartin tracks the Thomson Reuters series, and reaches a more optimistic conclusion. He sees Q4 growth of 6-6.5%, even after energy haircuts of 4% or so. Charges in the financial stocks have left the picture a bit “murkier” than usual.
  • Building permits declined. Calculated Risk, a great source on a complex story, provides some perspective, by focusing on single-family authorizations, up 4.4% from November.
  • Existing home sales missed monthly expectations and declined for calendar 2014. There was a reduction in inventory to a 4.4 month supply. Calculated Risk has analysis and charts, including this one:


  • Initial jobless claims declined to 307K, but still higher than the recent results. This is a mild negative in a noisy but important series.

The Ugly

The Ukraine conflict. War has exploded anew on multiple fronts. We have been following events with concern about the human toll, but also the growing effect on the world economy and financial markets. The New York Times has a good account. Also important updates from Stratfor via GEI.


Enthusiasm is an ingredient for success. We can all learn from “everyone’s favorite person” and the “most positive person in any room he entered.” More at the Trib and also the NPR account.

Let’s play two!

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts.  Think of The Lone Ranger. No award this week, but nominations are welcome.

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.

Recent Expert Commentary on Recession Odds and Market Trends

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.”

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting market indicators.

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (three years after their recession call), you should be reading this carefully. Doug has the latest interviews as well as discussion. Also see Doug’s Big Four summary of key indicators.

Georg Vrba: has developed an array of interesting systems. Check out his site for the full story. We especially like his unemployment rate recession indicator, confirming that there is no recession signal. Georg continues to develop new tools for market analysis and timing. Some investors will be interested in his recommendations for dynamic asset allocation of Vanguard funds. Georg has a new method for TIAA-CREF asset allocation. He has added a method for Vanguard Dividend Growth Funds. I am following his results and methods with great interest. You should, too. Georg’s update this week was his BCI index, also showing very low recession changes.

Despite the facts, the average fund manager or trader views oil prices as a recession signal. (MarketWatch)

The Week Ahead

It is back to normal for economic data.

The “A List” includes the following:

  • Initial jobless claims (Th). The best concurrent news on employment trends, with emphasis on job losses.
  • FOMC rate decision (W). Difficult to imagine fresh news from this, but some will find it.
  • Crude oil inventories (W). Attracting a lot more attention these days.
  • New home sales (T). Important read on housing sector contribution to the economy.
  • Consumer confidence (T). Conference Board version reflects employment and spending trends.
  • Michigan sentiment (F). Usually parallels the Conference Board, despite different methods.

The “B List” includes the following:

  • Q4 GDP (F). This could be a surprise, but most see it as “old news” that will be revised multiple times.
  • Chicago PMI (F). This is the only regional index worth watching because of the correlation with the national ISM index. It has special interest when there is a weekend in between the two.
  • Durable goods (T). Important GDP element.
  • Pending home sales (Th). It is important to watch all things housing, but this is less significant than new home sales (above).

First Greece, then the Fed, but mostly, attention will focus on earnings reports.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Last week Felix switched to “neutral” for the three-week market forecast, but I noted that it was a close call. The data have improved a bit, but still marginally neutral. There is still plenty of uncertainty reflected by the high (but declining) percentage of sectors in the penalty box. Our current position is still fully invested in three leading sectors, but these include some defensive themes. For more information, I have posted a further description — Meet Felix and Oscar. You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.

As I have noted for three weeks, Felix continues to feature selected energy holdings.

Mike Bellafiore warns about eight ways you can blow up your trading account. My regular readers will recognize warnings about choosing the wrong time frame and excessive size. The point about commission costs is interesting. Before reading the entire article, try to guess the commissions paid by those at Bella’s prop trading firm.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. Major market declines occur after business cycle peaks, sparked by severely declining earnings. Our methods are focused on limiting this risk. We have recently updated our current ideas for investors.

Other Advice

Here is our collection of great investor advice for this week:


David Merkel has been a champion at warning investors. His latest post on promoted stocks is worth a careful read. I strongly agree, especially about stocks where the company and symbol are advertised on TV or radio.

Stock Ideas

Barron’s has a feature on Where to Find Gains as Profit Slows.

It is also Part 2 of the annual three-part roundtable series. There are a number of diverse opinions about the economy, the market and twenty-two specific stock ideas. Fellow chess players can also tell me if the game on the cover photo could be achieved through actual play.

Brett Arends has the ten most hated stocks. These are given low ratings from analysts (something that we rate as a positive in our own stock evaluations). Here is his comment:

It’s surprisingly diversified, from oil drilling to soup. The price-to-earnings ratios are also surprisingly high for unpopular stocks — you might expect them to be below the market average, which is around 16 times forecast earnings — but companies under a cloud often have artificially depressed earnings. The dividend yields look juicy, but they need to be taken with tablespoon of salt, especially the supposed 10%-plus yields sported by the two drilling companies. Yields that high usually signal that Wall Street expects the dividend to be cut.

Energy Prices

David Kelly, Chief Global Strategist for JP Morgan funds, has an interesting Barron’s column on how to interpret declining energy prices. Here is a key quote:

On oil prices, three things need to be underlined:

First, falling oil prices are not a reliable signal of impending economic weakness. The reality is that the oil plunge was largely caused by a small but growing oversupply in the global market, amplified by OPEC’s unwillingness to offset rising U.S. production and a very significant shift in sentiment among commodity investors. Weak demand from Europe and Japan has slightly exacerbated the oversupply situation. However, the current plunge in prices does not forecast severe economic weakness any more than oil at over $140 a barrel in the summer of 2008 forecasted economic strength.

Second, falling oil prices are an unambiguous positive for the U.S. economy. Despite the surge in fracking activity, the U.S. remains a net oil importer, and falling gasoline prices are having a major impact in boosting both discretionary consumer income and confidence. This is why cheaper oil should, in general, be positive for U.S. stocks.

Third, enjoy it while it lasts, as oil prices are likely to gradually recover. From the start of 2011 to the middle of 2014, Brent crude oil prices generally hovered between $100 and $110 per barrel This gave plenty of time for producers and consumers to adapt to $100 oil. In reaction to a sudden price fall to below $50, consumption will gradually rise and production will gradually fall.

Market Prospects

Adam Parker, Morgan Stanley’s Chief US Equity Strategist, was famously bearish a few years ago. The data have altered his expectations for this year’s stock market to a gain of 11%. He expects this to come from a combination of 6+% earnings growth, 2+% stock buybacks, and 2+% dividends. He makes the interesting point that earnings expectations for the energy sector have declined dramatically. Analysts for sectors that benefit from lower prices may be playing “wait and see.” This is a video worth watching.

Stock Market’s fate depends upon the next six days. I understand the demands on people who write lots of columns, but please…… This is just silly. Since the actual story is more balanced, I am hoping that it is another case of editors goosing page view with a misleading headline. Sheesh! Can’t Hulbert complain about this?

Sources of fresh buying for stocks? Business Insider cites Citi’s Investment Themes for 2015.

Schofield writes that these are the biggest secular trends that will drive demand:

High Net Worth individuals have been very wary of equities since the financial crisis, but with the yield on the 10-year note below 2% and lower in Europe and Japan, they will switch.

Insurance companies will increase their buying after a 15-year selloff because of changes in capital regulation and an increased focus on asset-liability management.

Companies will take advantage of low rates to buy back their stocks.

Investor Psychology

Ben Carlson had another thoughtful observation this week. The theme is difficult to capture, partly because he describes it as “a few random observations.” I liked them and you will too. Especially this one:

Good investment advice will always sound the best and make the most sense when looking back at the past or planning ahead for the future. It will rarely sound so great in the moment when you actually have to use it.

Final Thought

This week’s potential themes all defy prediction. I do not know what will happen in Greece. I question the preliminary analysis of the ECB moves. The earnings stories have been a bit better than market forecasts, but with little reaction.

This may be another case of divergence between the trading and investing time frames. There are plenty of attractive stocks for investors. A cautious approach is to wait until the companies have reported earnings, perhaps missing a percent or two from the bottom. Following our precept of “Take what the market is giving you,” there are continuing opportunities in regional banks, cyclical names, technology, and consumer discretionary. When times are uncertain, it helps to have a shopping list!

Top picture via Pixabay. 

Self-Driving “Fully Automated” Vehicles on German Autobahn; Supply Chain Math; Uber and Khan Academy

Courtesy of Mish.

Don’t worry taxi drivers, this is only a test: Self-driving cars to hit German Autobahn.

A section of the A9 Autobahn in Bavaria will be converted into a test route for self-driving cars, Transport Minister Alexander Dobrindt said on Monday.

“We will set up a test stretch on the A9 Autobahn” Dobrindt told the Frankfurter Allgemeine Zeitung in an interview, adding that the first steps towards the “Digital Testing Ground Autobahn” project would be taken this year.

Under Dobrindt’s plan, the upgraded road will offer infrastructure allowing the cars to communicate with the road and with other vehicles around them.

“Cars with assisted driving and later fully-automated cars will be able to drive there”, Dobrindt said.

“The German car industry will also be able to be world leaders in digital cars”.

He added that “German manufacturers won’t rely on Google” – the current leader in the field – to produce their own self-driving vehicles.

Cars, Trucks, Taxis

People will not give up their cars. But who needs truck drivers? And who needs taxi drivers?

I suspect trucking will be the first industry to go mostly driverless.

The Last Mile

Many claim trucks cannot load or unload themselves. Others argue trucks cannot maneuver around cities. Let’s assume those objections are true whether they are or not.

Here’s the simple solution as I have proposed before: Nothing stops a trucking company from having distribution facilities right off an interstate near major cities where local drivers deliver the goods the last mile….

Continue Here

Self-Driving “Fully Automated” Vehicles on German Autobahn; Supply Chain Math; Uber and Kahn Academy

Courtesy of Mish.

Don't worry taxi drivers, this is only a test: Self-driving cars to hit German Autobahn.

A section of the A9 Autobahn in Bavaria will be converted into a test route for self-driving cars, Transport Minister Alexander Dobrindt said on Monday.

"We will set up a test stretch on the A9 Autobahn" Dobrindt told the Frankfurter Allgemeine Zeitung in an interview, adding that the first steps towards the "Digital Testing Ground Autobahn" project would be taken this year.

Under Dobrindt's plan, the upgraded road will offer infrastructure allowing the cars to communicate with the road and with other vehicles around them.

"Cars with assisted driving and later fully-automated cars will be able to drive there", Dobrindt said.

"The German car industry will also be able to be world leaders in digital cars".

He added that "German manufacturers won't rely on Google" – the current leader in the field – to produce their own self-driving vehicles.

Cars, Trucks, Taxis

People will not give up their cars. But who needs truck drivers? And who needs taxi drivers?

I suspect trucking will be the first industry to go mostly driverless.

The Last Mile

Many claim trucks cannot load or unload themselves. Others argue trucks cannot maneuver around cities. Let's assume those objections are true whether they are or not.

Here's the simple solution as I have proposed before: Nothing stops a trucking company from having distribution facilities right off an interstate near major cities where local drivers deliver the goods the last mile….

Continue Here > 

Picture source here. 

Why Priceline’s problems may soon be tech’s problems

The recent ascent of the US dollar and weakening of the Euro and Yen have far reaching consequences. For US companies that depend on foreign sales, the consequences can be harsh. Priceline's European assets get priced in US Dollars, making them worth less as the Euro falls. Further, the company's European customers have less money to spend. Sixty percent of Priceline's revenue is estimated to come from Europe. 

Why Priceline’s problems may soon be tech’s problems

By KEVIN KELLEHER at Pando Daily


Sometimes it seems like the tech industry is its own little world, comfortably insulated from the turmoil that might be happening in other parts of the global economy. That seemed the case back in 2009, when the streets of San Francisco seemed much more bustling with startup activity than anywhere else in the country.

Many of the startups that emerged during the course of the Great Recession have quickly grown to become successful business models that are pursuing expansion in Europe and Asia. In doing so, they are finding it harder to stay immune to the turmoil in other economies. Those facing this conundrum might keep an eye on Priceline, which has been getting hit by economic forces beyond its control.


….The primary reasons for Priceline’s lackluster performance have more to do with where it’s doing business, rather than how.

About 87 percent of Priceline’s revenue comes from international markets – with 60 percent alone estimated to be coming from Europe – but the company reports results in US dollars. The problem is that the dollar has been growing stronger against most major currencies as the EU and Japan have been pushing generous monetary policies that result in weaker currencies. As the company has noted in its SEC filings, “a weakening of the Euro decreases our Euro-denominated net assets, gross bookings, gross profit, operating expenses, and net income as expressed in US dollars.”

Keep reading Why Priceline’s problems may soon be tech’s problems | PandoDaily.

Picture via Pixabay.